Can Etisalat make 3G work?

UAE-based Etisalat, the Middle East's hugely profitable telecommunications and Internet service provider, is facing a crisis of confidence. And 3G is at the root of it.

Etisalat is the only regional telecom to have charted out a road map for its transition to a third generation (3G) mobile telephone service, which promises the possibility of permanent connection to the Internet and faster data transmission speeds. According to Etisalat officials, 3G will open up another huge market for the operator in years to come, bringing with it a higher revenue stream, as it will initially be offered as a premium service. They point to the record mobile phone penetration in the country - about 70 percent - and say that many subscribers will happily switch to 3G.

The telecom monopoly's officials appear to be undeterred by the grumbles emanating from Europe, where operators have had to make grossly expensive payouts for 3G licenses in the last couple of years. According to Etisalat's original blueprint, while it currently operates on a 2G platform, 3G will be a reality in the UAE by mid-2004. Trial tests have already commenced, and the company has roped in some of the leading equipment vendors. It's a who's who of the global telecommunications industry: Ericsson, Siemens, Alcatel and many others.

But, lately, doubts have started to be expressed in private among top Etisalat officials about the project's viability and schedule. There is a possibility that the original schedule may not be feasible, and the more likely timetable for a full launch will be early 2005.

One reason being touted for the "partial reconsideration" is that original estimates for the project have proved to be too optimistic. So much so that Etisalat is now "forcing" the vendors to offer better (meaning lower) quotes if they are to be considered for the final phase of the trials, say industry sources.

"If they believe that 3G can be implemented at the lowest cost possible, then Etisalat is better off not doing it. Low cost and 3G are purely contradictory terms," said a senior official with one of the vendors in the running for the contract. "We are in constant talks with Etisalat to reach an understanding on the costs involved, and I am still hopeful that something positive will emerge."

Etisalat has closely guarded the details of the costs involved, preferring to hide behind the wall of "billions of dirhams." A realistic estimate for the full 3G implementation cycle, according to analysts, would have to start at over 4 billion dirhams ($1 billion). According to its 2001 annual report, the company has earmarked 3.4 billion dirhams for the development of its infrastructure over the next two years.

Elsewhere across the globe, there have been formal announcements about a postponement in 3G launch plans in major markets, except for Japan, which is going ahead with the I-Mode program for launch in 2003. The spate of failures in the global telecommunications sector in recent months has added another factor to the equation. This being the case, 3G is yet to be fully tested in any market. As for the other regional telecoms, they are concentrating on getting their GSM numbers in place. Mobile phone penetration in these markets still leaves room for substantial growth.

The Saudi Telecommunications Company (STC) recently awarded a major contract to Britain's ailing Marconi for an expansion of its GSM network. More concerned with the privatization program of STC and getting better revenues from its fixed-line and GSM businesses, 3G is far from the top of the agenda in the kingdom.

Recently, Qatar's Q-Tel, in which Etisalat has investments, decided to join forces with Siemens on a similar project. Bahrain's Batelco seems to be the only other regional telecom that has chalked out a partial road map for 3G - but it prefers to see solid results elsewhere before it ventures forth.

Etisalat officials are naturally reticent when asked about whether they would consider a rethink. Said a spokesperson, "Etisalat is fully committed to backing the introduction of 3G services in the UAE. With the support of our vendors, we are moving on schedule, and the results will be shortly visible."

However, some of the vendors involved in the project are displeased with Etisalat's efforts to obtain the lowest possible cost. "We have a history of several years in dealing with Etisalat, and obviously they are quite good at playing one vendor against the other," said an official with one of the major vendors. "The same story is being repeated in the 3G program, but with even more intensity."

Even if Etisalat does go ahead with 3G, there are doubts whether it will be able to get the projected returns. Pitching it as a premium service will have its obvious weaknesses. Despite the impressive 70 percent penetration rate for mobiles, this was achieved only after Etisalat dropped its rates substantially. In 2001 alone, Etisalat cut its GSM peak rates by 23 percent and mobile subscriptions by 33 percent for post-paid and 46 percent for prepaid. As a result, average yields are expected to come down in the near term.

The biggest worry about the future feasibility of the 3G market stems from the UAE's demographics. "There is only a niche of professionals and tech-savvy youths who will be captivated by 3G. This represents less than 10 percent of the UAE's population of 3 million," says one analyst. "For the majority, it just does not matter whether they are able to surf the Net on their mobile."

A niche market will not be able to deliver the return on investments that Etisalat seeks. And if 3G rates are cut just after launch, that would be interpreted as a sign of weakness.
The company did report handsome revenues for 2001 - 7.6 billion dirhams - and a net profit of 2.5 billion dirhams. Mobile phone usage accounted for 46.2 percent of revenues, while the fixed-line business brought in 38.6 percent and Internet services another 3.8 percent. But there are mid-term worries. The growth in the number of new Internet subscribers has leveled off, and will peak at 290,000 by the end of the year. The uptake by small and medium-sized businesses has been marginal.

Etisalat has not gone far with WAP (wireless application protocol) either. Billed as a killer application that would trigger a burst of growth in mobile usage, it has failed abysmally all over the world. The UAE telecom did notch up some decent subscriber numbers at the launch of its WAP service in 2000-01. By the end of the year, the number of WAP subscribers reached 150,000. However, WAP growth has declined markedly, and there are reports that many subscribers have pulled out. If the trend continues, WAP will prove dead weight in Etisalat's portfolio.

As the sole operator in the UAE, Etisalat can recover its capital eventually. But only time will tell whether 3G will prove to be another WAP. Industry analysts say that it will take up to eight years for 3G license holders to break even. For Etisalat, then, these may be the last moments of calm before the coming storm.